16 January 2009
By Tash Shifrin
The economic downturn could hit the quality of public services, as falling income combines with rising levels of demand, experts have claimed.
The warning in a January 13 report by consultancy Deloitte came as the government launched a series of initiatives aimed at boosting jobs and easing the effects of the recession on the private sector.
The report, Turning the tide, declared that net taxes and National Insurance contributions are projected to fall by 3.3% in 2009/10, while stamp duty revenues would plummet by 40% in this financial year and business rate receipts would be £300m below the 2008 Budget forecast.
At the same time, demand on services in areas such as homelessness and criminal justice could increase.
The report also warned that councils and the NHS could be forced to pick up the pieces if the already vulnerable private sector social care market were to be badly hit by the crisis, creating a 'systemic failure'.
'As the economic downturn takes hold, private social care providers could withdraw from the market, diverting demand for long-term social care to the NHS and councils,' it said.
Mike Turley, head of Deloitte's public sector practice, said there had been more focus on the impact of the crisis on consumer spending, the financial sector and private sector jobs than on the public sector.
He told Public Finance there would be 'a significant impact' from rising demand on services and 'constraints on revenue and income at a national and local level'.
There were 'inbuilt tensions' between the need for the public sector to deal with fiscal constraint and rising demand and their role in helping to lift the economy, Turley added, claiming that this was 'uncharted territory'. Deloitte's warning came as figures from the National Institute for Economic and Social Research showed the recession deepening. Its estimated gross domestic product figures, released on January 10, showed output falling by 1.5% in the three months to December.
'Since 1955, when quarterly figures were first produced, there have been only five quarters in which output has fallen more sharply, with the lowest figure of –2.6% in 1958,' the NIESR said.
The government responded to the deepening gloom with the announcement by Prime Minister Gordon Brown of a £500m package to boost employment, including a £2,500 handout to businesses for every job given to a long-term unemployed applicant. The money is set to come from Treasury reserves earmarked in the Pre-Budget Report.
Brown told a jobs summit on January 12: 'Today the number of long-term unemployed is around 100,000. In the recessions of the 1980s and 1990s it was more than 1 million. All our efforts must be to strive to prevent that from happening again.'
The move was welcomed by the Trades Union Congress, although a spokesman added that 'more needed to be done' to protect jobs.
But the CBI gave it a lukewarm response. Its deputy director-general, John Cridland, said: 'We believe that the best way to protect jobs and the economy is to target the credit crunch.'
The business lobby was not appeased by Business Secretary Lord Mandelson's announcement that the government would make £10bn available to underwrite £20bn of bank lending to medium-sized firms and would also secure £1.3bn loans to small firms.
The Conservatives claimed the measures did not go far enough.
Shadow chancellor George Osborne said: 'It should be on a scale that reflects the size of the problem, which is why we proposed £50bn of guarantees.'
Liberal Democrat Treasury spokesman Vince Cable called for the part-nationalised banks to be 'brought fully under government control in order to perform the function of lending to sound British businesses'.
NIESR director Martin Weale suggested the loan guarantees would not necessarily have an impact on the public finances. 'The money is only spent if the guarantee is needed,' he added.
The falling output figures were more significant, he argued, with GDP now likely to decrease by 1.5% to 2% next year, rather than the 0.75% predicted by the Chancellor Alistair Darling.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, said: 'The worse the short-term picture gets, the less confident we can be that [the economy] is going to bounce back as much as previously thought.'
PFjan2009
